Breadth For The 9 S&P 500 Sectors

Below are the charts showing price (most charts are price only and not dividend adjusted outside of $XLF, which is divided-adjusted) as well as the sector’s respective Advance-Decline Line. The Advance-Decline Line is one of the most commonly used tools to measure the breadth, which is just a fancy way of saying participation, within a market. A-D Lines simply measure the cumulative number of underlying stocks that are rising or falling. When a sector is hitting new highs, ideally you want its breadth measurement to also be in a strong up trend and hitting new highs. It’s when these two diverge that we see a warning sign that the trend may be changing as the level of participation by individual stocks is not showing strong support.

Health Care
The SPDR Health Care ETF ($XLV) is currently trading in a consolidation pattern with resistance around $71.50 and support of a rising trend line connecting the prior higher lows. The A-D Line for Health Care is near a new high and has shown a solid level of support by the underlying health care stocks.

Consumer Staples
$XLP has been in a down trend since its mid-2016 peak, however price has recently broken above the declining trend line as buyers have re-entered the market for consumer staple stocks. The A-D Line for $XLP has been showing a greater sign of strength having risen back to its prior high and is ready to potentially breakout.

Utilities
The utilities sector ($XLU) has been improving since November but still well off its mid-2016 high. Breadth has maintained its up trend for $XLU, not putting in any lower lows like price has over the last 6 months.

Materials
The materials sector has been in an up trend since its early-2016 low and is currently testing a trend line off its intermediate low from November. $XLB’s A-D Line test its prior high but was unable to break out like price had last month.

Consumer Discretionary
$XLY has been setting new highs after putting in an intermediate low in November. However, its Advance-Decline Line has not been able to breakout quite yet – still sitting under its prior August high.

Energy
$XLE had a strong 2016 after declining for several years. However, it’s A-D Line has not been seeing the same level of strength, creating a bearish divergence since for the last several months. While the sector has been rising, it appear many individual energy stocks have not been as lucky.

Financials
Financials have been one of the strongest sectors since the November U.S. election. Price has been attempting to set a new high and the sector’s A-D Line has been support of that attempt, remaining strong and confirming price’s advance.

Industrials
Similar to $XLF, Industrials have been quite strong since the November election with price hitting new 52-week highs. $XLI’s A-D Line has continued to confirm the moves made in price.

Technology
Finally, the last of the S&P sectors and one of the strongest of the group. Technology has continue its up trend and practice of hitting fresh new highs. Fortunately, the A-D Line has continued in its up trend as well. While the A-D Line hasn’t quite broken out like $XLK has most recently, it is very close to doing so.

Update: While Real Estate has been added as a sector, I unfortunately am unable to find an advance-decline line for it, so it has to be left out of this post at this time.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Risk of Rising Volatility

As a trader and portfolio manager I spend a lot of my time evaluating risk. The need to manage risk within a position and an overall portfolio is a key tenet in having long-term success in investing. One the methods I use to evaluate risk is by applying varies methods of analysis to volatility, which includes the VIX Index. Using a compilation of data inputs, below is a rough chart showing prior instances that match the current market environment as it pertains to the VIX.

When the data has been at these levels in the past, the Volatility Index has seen some fairly substantial advances, however, sometimes the move (like at the end of December ’16) are minor – but often we do indeed see a rise in volatility. As the chart below shows, sometimes it takes a week or several for the VIX to move higher but past occurrences haven’t seen the VIX decline much further from that point forward.

While I’m happy to see new highs in several of the major indices, I think the risk/reward right now, at least when it comes to the Volatility Index, has risen substantially.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Using The Metal Markets to Forecast The Direction of Interest Rates

In a recent podcast interview with Tim Ferriss, Adam Robinson mentioned an interesting observation about interest rates. Adam is the co-founder of The Princeton Review, a chess master and  an advisor to several hedge funds and investment managers.

Adam mentioned that one of the tools he uses to evaluate the fixed income market is the relationship between copper and gold. With a very high correlation to the 10-year Treasury yield, when the ratio between these two metals is rising, often are interest rates. The chart below shows the current 90-day correl is 0.98.

Knowing that the ratio between copper and gold is highly correlated to interest rates, we can apply a degree of analysis to gold and copper and make a forecast for where the ratio may be headed and thus, the direction interest rates may be moving.

One method we can use is looking at the Commitment of Traders data. Below is the COT report for gold. In the bottom panel we can see the three category breakdown of each trader group. The Commercial trader (often considered the ‘smart money’ has been working off their large net-short position in gold, which hit its largest point in June when gold put in a short-term high. Since then, Commercial traders have been moving their net-position to near neutral, a positive sign for gold bulls.

Turning our focus to copper, the COT report shows us that the Commercial traders have been betting against copper, holding one of their largest net-short positions.

So from these two data sets we know that Commercial traders appear to be becoming more bullish on gold and are bearish on copper. That would imply that the ratio of copper vs. gold could be heading lower, and in turn interest rates declining as well.

This is all good but how are traders position in the actual bond market? we can look at COT data to evaluate the fixed income market. Below is the COT report for the 10-year Treasury Bond. We can see that Commercial traders have been adding to their net-long position in the 10-yr bond, putting their position at one of the most bullish levels in quite a while.

In summary, as Adam pointed out, copper and gold have a high correlation to interest rates, and based on the COT data it appears we could be seeing a shift lower in the ratio between these to metals, a bearish move for Treasury yield. Based on the COT chart for bonds themselves, it appears the ‘smart money’ is using both hands to buy up this dip in bond prices.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.